Clients and their costs: understanding the risks

Law firms have always faced pressures about the services they provide. But as new ways of working are being adopted, it has become more important than ever to demonstrate value for money to clients.

It is therefore essential for firms to understand the costs (and risks) of taking on some clients, and how these costs can vary.

Managing client demands and avoiding losses

PwC’s Annual Law Firms’ Survey 2023 found that profits for the top 100 UK law firms have been flat over the past five years. Consequently, legal clients might decide they can demand more for their money, while firms might feel they need to accommodate them to stay in business.

The way firms earn money from clients can vary for many reasons, such as the location of work and the type of business. Claims in general are also higher than they used to be. How quickly a firm gets paid after completing work, known as ‘lockup days’, can also be very different across practices.

Law firm losses have increased in recent years, and client demands can be unpredictable and difficult to manage.

Sharon Glynn, managing director at Travelers Europe, explains: “Everything a law firm does comes at a cost, so when firms are assessing the true cost of a client, it’s important for them to look beyond the specific work and consider the bigger picture.

“There are many commercial concerns fee earners need to consider when deciding whether or not to accept instructions: the nature of the client, the firm’s ability to meet demand and how to manage expectations. All of these factors impact how profitable a client will be for a firm.”

Client cost: the bigger picture

Many law firms have ways of monitoring client costs. Some of these costs are difficult to predict, but others are not – and factoring this in can help a firm build resilience.

Below are some key areas where firms can have better cost control:

• improving working capital performance by centralising collection processes, improving reporting, recording time promptly, improving control of billing terms and using more automated processes
• measuring overall costs accurately to show how high expenses might affect the firm’s fee
• ensuring appropriate work allocation
• planning for varied financial outcomes of client work
• increasing contact with compliance teams to manage differences in requirements and audits
• assessing whether workstreams generate more disputes and claims, and providing risk management resources to mitigate these
• ensuring that fixed-fee work is appropriately staffed and supervised, and
• encouraging fee earners to think like business owners.

The PwC survey also found that the main priority of the top 100 UK law firms was improving working capital performance, followed by changing processes and ways of working and also using data analytics to make effective decisions.

Cost awareness: a risk management strategy

Getting the client cost strategy wrong, or not giving it the attention it requires, can create challenges for a firm. This makes accuracy with client cost calculations especially important for firms as part of their risk management.

Legal services pricing consultancy Validatum warns that when a law firm’s pricing strategy is mismanaged, the firm risks damaging its brand, reputation and financial strength.

“As firms look to profit in a shifting and increasingly competitive landscape, analysing overall costs with greater precision can place them on stronger footing. It frees firms to focus on building strong relationships with clients and providing solid value – helping them attract and retain the business that generates the greatest benefits for them.”

Sharon Glynn adds: “If the firm positions itself towards the premium end of the spectrum but engages in pricing behaviour more akin to the budget end, that behaviour will, over time, inflict considerable damage on the firm.”